If all the people in the economy increase the proportion of income they save (i.e. is the MPS of the economy increases) then the total value of savings in the economy will not increase, it will either decline or remain unchanged. This result is known as Paradox of Thrift, which states that as people become more thrifty, they end up saving less or same as before. When there is an information about some impending disaster or imminent war, people suddenly become thrifty and MPS of the economy increases, which leads to a decrease in MPC This sudden decrease in MPC will imply a decrease in aggregate consumption and hence in aggregate demand. This can be regarded as autonomous reduction in consumption expenditure. As aggregate demand decreases stocks are piling up in warehouses and producers decide to cut value of production.

If all the people in economy increase savings, what will happen in the economy?

The total value of savings in economy will not increase, it will either decline or remain unchanged

The passage states that if all the people in the economy increase the proportion of income they save, then the total value of savings in the economy will not increase, it will either decline or remain unchanged. This is known as the Paradox of Thrift.

The paradox arises because when people save more, they spend less. This means that businesses have less money to sell their goods and services. As a result, businesses may lay off workers or cut production. This can lead to a decrease in aggregate demand, which can further reduce economic activity. So, while it may seem that saving more money is always a good thing, it can actually have negative consequences for the economy if everyone does it at the same time. This is why it is important for policymakers to consider the potential impact of their decisions on aggregate demand. In the short run, a decrease in aggregate demand can lead to a recession. This is because businesses will have less money to spend on goods and services, which can lead to layoffs and a decrease in consumer spending. In the long run, a decrease in aggregate demand can lead to slower economic growth. This is because businesses will have less incentive to invest in new products and technologies.

Therefore, it is important for policymakers to take steps to stimulate aggregate demand when it is weak. This can be done by increasing government spending, cutting taxes, or lowering interest rates.